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Edited Transcript of MAH.AX earnings conference call or presentation 30-Aug-19 1:00am GMT

Full Year 2019 Macmahon Holdings Ltd Earnings Call

Western Australia Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Macmahon Holdings Ltd earnings conference call or presentation Friday, August 30, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Roland Giles Everist

Macmahon Holdings Limited - CFO

* Michael Finnegan

Macmahon Holdings Limited - CEO & MD

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Presentation

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [1]

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Thank you. Welcome, everyone, and thank you for joining us this morning for Macmahon's 2019 Full Year Results Presentation. We appreciate you taking the time to join us. My name is Mick Finnegan, and I'm the Chief Executive Officer of Macmahon, and I'm joined by our CFO, Giles Everist; and Investor Relations Manager, Chris Chong. Giles and I will run through our full year results and outlook before opening to questions.

But before I go into the slide deck, I'd like to make some high-level comments. This was clearly a strong result for Macmahon. We delivered more than $1.1 billion in revenue and an EBIT of $75.1 million, both up considerably on last year and in line with our guidance. Pleasingly, we have entered the 2020 financial year in a strong position, we're going to achieve earnings growth by simply executing on our secured order book, which delivers our FY '20 guidance of revenue of between $1.2 billion to $1.3 billion and an EBIT of between $80 million to $90 million.

In addition to this, we have enviable visibility on the medium term, which is supported by a $4.7 billion order book. And we have strong growth potential based on our tender pipeline of over $7 billion. Furthermore, the business is continuing to diversify. This can be demonstrated by the recent acquisition of specialist underground mining contractor, GBF, ensuring Macmahon is a now a leading contractor across the full mining chain.

So with that, I'd now like to begin on Slide 2 and point out some more highlights. Firstly, operating cash flow was up 24% from the prior year to $125.9 million, while our balance sheet remains strong with low gearing of 10.5%. These factors, along with our positive growth outlook have enabled Macmahon to reinstate dividends. This will be the first dividend we've declared in 7 years, and we anticipate this will continue. On our FY '20 guidance, it is important to note the $1.2 billion of revenue is already secured, and this doesn't include civil or underground churn work.

Turning now to Slide 3. I'd like to go into some of the key developments in the year. At Macmahon Surface Mining operations, our core projects continued to consistently perform very well. Positively during the year, we achieved record monthly volumes at many of our major projects, including Batu Hijau, Byerwen, Tropicana, Telfer and Mt Morgans.

In Underground, there were substantial positive changes and growth during the year. We secured the $170 million Boston Shaker underground contract at the Tropicana gold mine in Western Australia. This alliance style contract with AngloGold Ashanti and Independence Group will be delivered over 5 years and has started ahead of schedule. Having a presence on-site at the surface operations assisted with this and we will also deliver many synergies. We believe this result reinforces the benefits of having one mining contractor offering a wide range of services on the one site. In addition, subsequent to the year-end, we completed the acquisition of specialist underground contractor, GBF Group. This is a major step change for our underground division, which we are very excited about.

At this point, I'd also like to touch on 2 business-critical issues being Telfer and the Board. We've been working very hard to reach a fair and amicable outcome with Newcrest regarding changes to the mine plan and contract program at Telfer. As you know, we completed the facilitated process on the 5th of August, where we received offers from Newcrest, however, we were unable to reach an acceptable outcome for Macmahon. Since then, Newcrest reached out to continue talks, and we have been very close to an outcome this week, which is why we went into a trading halt and then suspension. Discussions are ongoing. However, we are aligned in all but 1 area. The Newcrest position is subject to Board approval. However, we understand that they have been braced.

We expect completion of this process in the coming weeks. However, as a result, our current assessment of this project based on what is aligned between the parties is it will be cash flow positive, and hence, no onerous provision has been taken. We do want to thank Sandeep and his team for their involvement and progress to date. This is a positive outcome for both parties, and I look forward to working productively with Newcrest in the future. I would like to thank all those involved in this process and the whole Macmahon team working at Telfer.

Meanwhile, as many of you would be aware, in June, Jim Walker and Kim Horne resigned as Directors. These resignations were unexpected. However, I can assure you there are no fundamental issues or ticking time bombs that you don't know about, and there has been no change to Macmahon's strategy. We've clearly delivered strong results, and our outlook is very positive. We now have the opportunity to pursue Board renewal and set the company up for the future. The Board intends to appoint 3 new independent Directors at this stage, and discussions with high-caliber candidates are well underway with appointments to be made in due course.

Turning now to Slide 4, titled people and safety. Improving safety across all business operations is a core strategic priority for Macmahon. Pleasingly, our lost time injury rate improved 37% over the year, and the majority of our projects remained LTI free during the period. Unfortunately, these achievements were overshadowed by a tragic fatality at our Batu Hijau operation in March. We express our sincere condolences to the family, friends and colleagues of the late (inaudible), and we remain determined to continuously improve our processes and culture to ensure every team member can go home safely every day.

Turning to our people. We are committed to creating a positive culture and developing and retaining key personnel. During the year, we implemented a range of initiatives, including expanding traineeships and apprenticeship platforms, commencing a comprehensive leadership program and continuing our group-wide programs focused on boosting female and indigenous participation across the group. We're also very proud of our mental and physical health program, Strong Minds, Strong Mines, and this is championed by Soa Palelei

Turning now to Slide 5, key contracts. As I mentioned earlier, our surface operations have continued to perform well. At Tropicana, the alliance team has continued its consistent and solid operational delivery. A keen focus on operational excellence has led to production records being achieved, and this will assist the team in potentially gaining approval to extend the mine life beyond 2023. Meanwhile, our teams at the Batu Hijau copper/gold mine continued to perform well. The alliance team achieved record monthly volumes on multiple occasions during the year, which was on the back of world-class excavators and truck productivities. Encouragingly, AMNT is now exploring a potential [phase 8] at the Batu Hijau pit, which is in addition to the development of its significant Elang deposit. In Queensland, our project of Byerwen Coal Mine has continued to successfully meet or exceed targets. And our client QCoal is currently progressing an expansion of the mine.

In our Underground business, we have performed strongly at our existing operations, including the Boston Shaker project, which commenced successfully in May at Tropicana. Importantly, we also continued to secure additional underground services work at Nifty, Fosterville and Olympic Dam. Furthermore, through the GBF acquisition, we are currently progressing multiple projects with Silver Lake Resources, Millenium Minerals and Pantoro. And finally, our civil business TMM Group successfully carried out a range of mine infrastructure and rehabilitation projects at Peak Downs, Saraji, Rolleston, Poitrel and South Walker Creek.

With that, I'd now like to hand over to Giles to run through the financials at a higher level.

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Charles Roland Giles Everist, Macmahon Holdings Limited - CFO [2]

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Thanks, Mick. Good morning, everyone, and thank you for taking the time to join us today.

Turning to Slide 7. As Mick has already described, FY '19 was a very positive year for the business across all of our core financial metrics. In fact, looking back over the past 3 years, you can see we have tripled our revenue, moved from losses to $75 million of EBIT and improved EBIT margins to close to 7%. We are suitably proud of these excellent achievements, and it is a true testament to the team.

I'll now go into more detail on the results, starting with the income statement on Slide 8. The strong revenue growth to over $1.1 billion was due to the successful ramp-up of contracts that commenced in FY '18, including Batu Hijau, Byerwen and Mt Morgans. Of note, over 60% of the revenue was attributable to Australia. While there was year-on-year margin improvement, the second half margin was impacted by the Telfer losses. Going forward, we will continue to strive for further margin improvement, driven by scale and better operating performance across our portfolio of contracts. One thing to point out on this slide is our effective tax rate of 12%, which results from the recognition of historical Australian tax losses. On the same basis, we expect our effective tax rate to be approximately 15% over the next 2 years.

Now turning to Slide 9 on the cash flow waterfall chart. The company generated $125.9 million of operating cash flow, representing an EBITDA cash conversion of 69.4%. Cash conversion was impacted by delayed receivables of $24 million, which were received in the first week of July. EBITDA conversion would have been 82.6% including these payments. In line with guidance, capital expenditure for the full year was $135.9 million, of which approximately $70 million was sustaining CapEx and $65 million was growth CapEx of the Byerwen, Tropicana, Boston Shaker and Mt Morgans projects.

Looking ahead, FY '20 CapEx is currently expected to be around $110 million, which includes sustaining CapEx of $85 million and supports our current work in hand. We have -- we have a healthy tender pipeline of opportunities and naturally expect our growth CapEx to increase if we are successful in winning new work.

Now turning to the balance sheet on Slide 10. We have a solid balance sheet with all our debt relating to equipment finance leases. As at the 30th of June, net debt was $52.7 million, which implies a low gearing ratio of 10.5%. Allowing for the delayed receivables, net debt would have been $28.7 million, which would have resulted in a gearing level of 6%. Positively, our underlying return on average capital employed and return on equity have improved to 13.9% and 13.2%, respectively, while NTA has increased to $0.203 per share.

Turning now to Slide 11, titled capital allocation policy and FY '19 dividend. As Mick mentioned, with the business generating good cash flow, having a strong balance sheet and considerable earnings visibility, we are very pleased to report the Board has reinstated dividends. This decision follows the adoption of a new capital allocation policy, which has been designed with a clear intention of paying sustainable dividends where it is appropriate to do so. The objectives of the new policy are to maintain balance sheet strength, assess revenue visibility and outlook, retain flexibility to invest in growth and return cash to shareholders. The FY '19 final dividend will be $0.005 per share, which equates to a payment of $10.8 million. It will be 30% franked and paid on the 29th of October 2019.

And with that, I will now hand back to Mick to run through the strategic objectives.

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [3]

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Thanks, Giles. Turning now to Slide 13, which provides an overview of our strategy on a page. We've been working on these core priorities for a few years now, and our operational and financial results demonstrate progress in delivering on this strategy. As you can see along the bottom of the slide, our overarching goal is to create a full-service contract mining business that can provide the full range of services to clients across all stages of the mining value chain. This strategy is unchanged and has only been strengthened with the GBF acquisition.

Moving on to Slide 14, which looks at the GBF acquisition. As I've touched on earlier, we are very pleased with the acquisition of GBF as it provides us with a step change in our underground mining, scale and capability. The company is well-known in Western Australia with a very strong track record and importantly, its culture is aligned with ours. We are encouraged with how the 2 teams have come together and the good interest we have received from the industry as a result. Combined, our Underground business is much stronger and allows us to pursue the extensive underground opportunities we now have in our pipeline, which brings me to our next slide, titled work in hand. As you can see, we're heading into financial year '20 in a very solid position with $1.2 billion of secured work, which underpins our guidance. Furthermore, our $4.7 billion order book is backed by higher quality, long-term alliance style contracts, which provide us with strong revenue visibility over the medium term.

Now looking closer at the pipeline on the next slide. As you can see, we currently have 24 tender opportunities in our immediate pipeline valued at more than $7 billion. This is work that falls across a range of commodities and is slightly weighted towards Australia over South-East Asia. Even more encouraging is the fact that we are preferred or exclusive on over $4.5 billion of these opportunities, most of which are with existing clients. Given our ongoing strong relationships and track record, we believe this puts us in a very competitive position to win this work. We also note that over $1.5 billion of this potential work could be awarded in financial year '20. When you combine our significant order book and tender pipeline together, we're in a very healthy position to deliver continued growth over the coming years.

Which brings me to our final slide regarding our outlook. A positive outlook is reflected in our FY '20 guidance, where we expect further earnings growth. For FY '20, we expect $1.2 billion to $1.3 billion in revenue and an EBIT of $80 million to $90 million. Going forward, we are confident of future growth, and we believe we are well positioned to secure more opportunities, particularly on complex projects, where having one provider complete multiple disciplines is beneficial to our clients.

During the year ahead, we will continue the integration of the GBF business, focus on securing new work and further leverage our end-to-end offering for the benefit of our new clients, colleagues and shareholders.

Now with that, I would like to open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Probably, there's no further questions at this time -- oh no, we have a question that just queued, sorry. We have a question from [Tony Greco], who's a private investor.

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Unidentified Participant, [2]

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Yes, just -- first of all, just congratulations on a great result, and good to see a resumption of dividends after the 7 years as you mentioned. Just a few questions. Since there don't seem to be too many others on the call or are queuing up, I'll sort of ask all if I can. Just with the current trade war with U.S. and China, should this escalate a bit further and mining sort of goes back into a bit of a downturn. Are we -- I mean with the low debt level, it seems as if Macmahon will be able to sustain a lower level of activity. I mean what are your thoughts as far as being prepared just in case the worst happens?

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [3]

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Look, [Tony], thanks for the question, and thanks for acknowledging the performance. Clearly, I'm not a global financial analyst, but there's a couple of things in there. You're right. We have got a -- we're lowly geared and our balance sheet is very, very healthy, which would help us in difficult circumstances. But we don't think -- we've got a heavy gold exposure as well, which, obviously, depending on how it goes, may assist, may not, I'm certainly not predicting the future. But also a lot of our projects, we do a lot of [DD] now before we engage. And they're very viable as they stand. And with the types of contracts that we've got, if there is flexibility required, we can facilitate that through the alliance style. So to answer your question, look, no one can predict the future, but if there was a bit of volatility, we have been intentionally trying to set this business up to be able to deal with it as best we can.

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Unidentified Participant, [4]

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All right. The other thing I noticed not much there as far as iron ore goes. I mean a couple of years ago, the contract with Fortescue been stopped. Any opportunities back into iron ore? I mean I guess, the higher price at the moment might be temporary, but what's that looking like?

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [5]

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Look, we've got a few jobs coming through where there's requests for interest [that iron ore]. But we throw the same filter over all potential projects, just to ensure its viability and its robustness. So we'd apply that same filter over any jobs, whether it be iron ore or copper or gold or coal. So they all go through the same process. And if they come in at the other end of that, and we feel like we could add value to the client, we'd pursue it.

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Unidentified Participant, [6]

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Okay. And one question just with the resignations of Jim Walker and Kim Horne, you did sort of allude that there was nothing sort of suspicious there or anything like that. Just what were the actual reasons? I did miss there was a call on the day that, that was announced, but I missed that. What was the sort of official reason for it?

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [7]

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Look, I mean, as I said here, and I'm not trying to dodge the question, they were totally unexpected. And the guys didn't give any reason. So I don't think it would be fair to us to put words into their mouths. So yes, we can't.

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Unidentified Participant, [8]

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Yes, okay. Yes, usually, it's like family reasons or whatever. But yes, just unusual that they both, I guess, just a quirk of the timing that they both happened at the same time and didn't give a reason. All right. No, that's all I had. And the only other thing is just your slide under [register]. Congratulations again with that good tick to the team that you're out there hiring the females, indigenous, just to get others in an organization. It's just a great thing to do. So well done with that. So again, congratulations, Mick and congratulations to the team.

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [9]

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Thanks, [Tony]. I appreciate that. And on the diversity, the ladies and all the participants in the business are A graded. So they do a great job regardless of male, female, where they're from, everyone in the team is doing an outstanding job. So it's pleasing to see the percentage has increased.

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Operator [10]

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(Operator Instructions) Our first question is from [Sanjay Patel] from (inaudible)

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Unidentified Analyst, [11]

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Congratulations on your great result. Just got a couple of questions for you. One, on your underlying EBIT margin, I see you've had expansion at 6.8%. But do you have an aspirational target in mind, given where you're going with the business. I assume that's going to drive up, given you're getting greater synergies, you're able to drive that cost down, and you're getting more revenue through the door?

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Charles Roland Giles Everist, Macmahon Holdings Limited - CFO [12]

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Thanks, [Sanjay]. In terms of margin, absolutely. We have an aspirational target of 7% to 8%. And we do anticipate getting -- continuing to strive towards that. One with scale and two with improved performances in terms of productivities across the projects -- the portfolio projects.

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Unidentified Analyst, [13]

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Great. And probably the second one is, there's not a lot of mention of the use of technology going forward. There's a lot of discussion around AI and transition to AI right across the spectrum of industry. So is that something that you're looking at in terms of how it will affect your performance? How you could improve performance?

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [14]

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Absolutely, [Sanjay], we're investing a lot of time and money in understanding the best way to operate the business in the future, and the way we collect data, the way we're using it or to trialing R&D on automation and live data and reporting applications. There's a whole lot out there for sure. Remote operations, there's a lot going on, and you're probably right. It's a good pickup, we should be marketing that a bit more.

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Operator [15]

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(Operator Instructions) Our next question in queue is from [David Hin] from [Hin Asset Management].

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Unidentified Analyst, [16]

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Great result. I was a little bit late on the call, I apologize. Can you just give us some color or some background to the Telfer contract going forward and the resolution?

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [17]

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Yes. Look, where we are at in the discussions, it's -- obviously, I said in the presentation, [David], that where we are still requires Newcrest Board approval, but we have been told the Board's being briefed to the current status of the position and it's all about 1 item left to resolve. And what that does, what we aligned in enables the project to be cash flow positive at the completion. And hence, why there's no onerous provision taken. But we do want to respect the process that needs to complete. And hence, we don't want to comment too much more, but we expect that to happen in the future weeks but as the worst case, if we complete where we are now, where we're aligned, there's no onerous provision required.

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Unidentified Analyst, [18]

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Okay. And just going forward, staffing levels, it's fairly tight in your space across [industrials] and [NIWs] of the world, how are you going for sort of staffing levels?

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [19]

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Look, where we're at now, we've probably set up for the steady state. Obviously, if there's -- that tax grows. If growth comes in, we would need to grow. But we've been through some pretty extensive growth at the end of '18, early '19, that's where we went from, I think, it was 700, 900 people to the 4,500, 5,000 we are now. So we're at a steady state, which, as you know, the guidance, $1.2 billion and the guidance for '20 is secured. So we can man that. But it's -- the hotspots really are maintenance and engineering that we see. Beyond that, we're finding not too difficult to get people. And we're at the levels we need to be at now.

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Unidentified Analyst, [20]

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And are you seeing a cost escalation in getting staff?

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [21]

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Look -- no -- to be honest, no. There's increases as CPI we're seeing in wages, if you're talking to that piece. Where I suppose it is costing us is we've increased apprenticeship intakes. We've increased traineeship intakes. We've increased (inaudible) intakes. We're investing a little bit more in leadership programs. But I'm not sure if you call that a cost because there'd be a return associated with that too, of course, [David].

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Operator [22]

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There's no further questions from telephone lines. I'd like to hand the call back to the speakers for closing remarks. Please go ahead.

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Michael Finnegan, Macmahon Holdings Limited - CEO & MD [23]

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Yes, thank you. Look, we'd just like to thank everyone for taking the time this morning. I know it's a busy time of year, and I do apologize that we had to go into a trading halt and then a subsequent suspension, but I think where we've got to is a good result. Hopefully, everyone's happy. And I do look forward to seeing all the people we're going to see over the coming weeks as part of the road show. But if anybody does have any questions, please reach out to Chris, Giles and myself, and we'll happily answer them, and we do appreciate everyone's support. Thank you very much.